Climate Risk and Real Estate Markets in the EU: Institutional Control Through Regulation

ABSTRACT Climate change is increasingly reshaping the economic foundations of asset markets, yet its implications for the estate sector remain unevenly understood, particularly when institutional and financial mechanisms mediate risk transmission. While a growing body of evidence links climate vulnerability to property valuation and market behaviour, existing insights remain fragmented across hazard types, market segments and geographical contexts, limiting a comprehensive understanding of how climate risks influence the performance and resilience of estate markets within highly regulated economies such as the European Union. Thus, we investigate the effect of climate risk on household net property income in the EU, focusing on the roles of physical climate vulnerability, greenhouse gas emissions and regulatory quality. The study is anchored on the efficient market hypothesis (EMH), adaptive market hypothesis (AMH), asset‐pricing theory and institutional regulation theory, which explain how climate‐related risks, investor behaviour and regulatory frameworks influence property‐market outcomes. The study employs Driscoll–Kraay fixed effects, two‐step system GMM and quantile regression for panel data (QRPD) using panel data for 27 EU countries. The findings show that climate risks generally weaken household net property income, although the effects vary across climate indicators and market distributions. Temperature increases, storms, floods and greenhouse gas emissions exert predominantly negative effects by increasing uncertainty, infrastructure damage, operational costs and valuation risks. The quantile results reveal substantial heterogeneity, suggesting that climate impacts are not uniformly distributed across low‐, middle and high‐performing property markets. Regulatory quality cushions climate‐risk transmission by improving risk pricing, encouraging adaptation and strengthening market discipline. The study contributes to the literature by linking climate vulnerability directly to household net property income, integrating physical risk and institutional quality within a unified framework, and demonstrating the heterogeneous nature of climate‐risk effects across property‐market distributions. The findings provide important implications for climate‐resilient housing policy, sustainable urban development and climate‐adjusted financial regulation within EU property markets. JEL Classification: Q54, Q56, M21, R31, G22, C23